One-stop education solutions company Elite Education Group International Ltd (EEIQ) provides study abroad and post-study services to Chinese students in the United States. The Middletown, Ohio-based company went public on March 25 through an initial public offering of 750,000 shares at $8.00 per share. 

The company has a major study-abroad partnership with Miami University (MU) of Ohio. It provides residential accommodations, a full-service cafeteria, recreational facilities, shuttle buses, and a campus office that offers students various study abroad and post-study services.

EEIQ’s shares have gained 23.7% in price over the past three months, driven by its continued efforts to expand its operations and further collaborate with domestic universities and institutions. However, it closed yesterday’s trading session at $5.58 and is currently trading 84.1% below its 52-week high of $35.20, which it hit on March 26. China recently tightened regulations for the private after-school education industry, a move that could negatively affect the company’s growth prospects.

Here’s what could influence EEIQ’s performance in the near term:

Regulatory Pressure Can Negatively Impact Business

The Chinese government’s crackdown on after-school education could suspend private institutions’ online and offline tutoring classes. Beijing’s policy calls for academic tutoring businesses to restructure as non-profits. Even though EEIQ has been expanding its offerings through strategic collaborations with various Chinese universities and institutions, the country’s new regulations for the private tutoring industry, to ease pressure on students, could hurt the company’s plans to collaborate with domestic universities in China and its online education platform.

Weak Financials

EEIQ’s operating loss was  $393.07 million, versus a $1.68 billion operating profit for the six months ended March 31, 2021. The company reported a $291.89 million net loss, compared to a $1.31 billion net profit  in the prior-year period. Its loss per share amounted to $0.04, versus a $0.17 EPS in the same period last year. In addition, its net cash used in operating activities surged 12.3% year-over-year to $2.87 billion.

Its trailing-12-month EBITDA margin, ROA, and net income margin are negative 11.5%, 3.9%, and 9.8%, respectively. Furthermore, EEIQ’s 0.5% asset turnover ratio  is 57.2% lower than the 1.1% industry average.

Stretched Valuation

In terms of forward EV/Sales, EEIQ is currently trading at 5.97x, which is 300.5% higher than the 1.49x industry average. In addition, its 7.15x forward Price/Sales of is 479% higher than the 1.23x industry average. Furthermore, the stock’s 4.92 trailing-12-month Price/Book ratio  is 63.1% higher than the 3.01 industry average.

Unfavorable POWR Ratings

EEIQ has an overall D rating, which equates to Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. EEIQ has a D grade for Quality and Stability. This is justified given the stock’s negative profit margin and higher volatility compared to its peers.

Also, the stock has a C grade for Value, which is consistent with the stock’s higher than industry valuation multiples.

Of the 32 stocks in the D-rated Outsourcing – Education Services industry, EEIQ is ranked #29.

Beyond what we’ve stated above, we have rated EEIQ for Sentiment, Momentum, and Growth. Get all EEIQ ratings here.

Bottom Line

While EEIQ has generated  significant momentum over the past few weeks, its weak fundamentals and poor profitability do not justify its stretched valuation. Also, the Chinese government’s efforts to regulate the private-tutoring industry could mar its growth and cause  the stock to suffer  a pullback in the near term. So, we think the stock is best avoided now.

How Does Elite Education Group International (EEIQ) Stack Up Against its Peers?

While EEIQ has an overall POWR Rating of D, one might want to consider looking at its industry peers, Lincoln Educational Services Corporation (LINC), which has an A (Strong Buy) rating, and Franklin Covey Company (FC), which has a B (Buy) rating.

Note that LINC is one of the few stocks handpicked by our Chief Growth Strategist, Jaimini Desai, currently in the POWR Stocks Under $10 portfolio. Learn more here.

EEIQ shares were trading at $5.32 per share on Tuesday morning, down $0.26 (-4.66%). Year-to-date, EEIQ has gained 33.00%, versus a 20.61% rise in the benchmark S&P 500 index during the same period.

About the Author: Pragya Pandey

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate. More...

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